Innovations in Belarus: When Dreams Come True

In the recently released state budget of Belarus for 2013, support of science features among the top priorities. This could signify a change of policy because for years state financing of science has been unacceptably low.

Even with the increase in...

Belarus National Library

In the recently released state budget of Belarus for 2013, support of science features among the top priorities. This could signify a change of policy because for years state financing of science has been unacceptably low.

Even with the increase in subsidies, achievement of ambitious goals in the innovation sphere has looked quite problematic. For instance, in 2011 one goal was to increase threefold the share of R&D products in Belarusian exports. But this year the percentage of such products in the overall country’s export declined by a fourth compared with 2011.

The government, however, wants to persist. Disappointed at Belarusian fundamental sciences, it is now focusing on commercialisation of intellectual property, attracting investments into innovations and hosting foreign technologies.

Foreign Investments: not just Money

Belarus has been claiming high interest in attracting investment in innovation since 2005. But only this autumn Mikhail Miasnikovich announced a new trend: Belarus prefers to attract investors with both money and technologies. The reason is that “we have no time for adapting technologies through the full technological circle”.

Probably, this decision comes not only from the fear of non-compliance with the ambitious goals set for 2011-2015. Belarus may turn out to be simply unable to reach the status of an innovative nation at a global level on its own.

Since 1994 the research intensity of Belarus’ GDP has fluctuated by between 0.63% and 0.97%. Generally, if this index falls under 1%, the nation’s scientific and technological potentials start to regress. It means that for the last 18 years the regression of Belarusian science and technologies has never stopped. Considering the technology boom which the Earth has seen during the last two decades, the negative result of such decline looks even more irrevocable.

Belarus Offers

Speaking about attracting investment, the Prime Minister emphasised that the government will provide investors with the necessary comfortable conditions: “Our legislative basis is good enough. Both our foreign partners and international financial institutions with whom we work mention it”.

Tax privileges are among the main hooks the state is using to attract investments. Exemption from corporate income tax (the statutory rate is 18%) granted with respect to income from sale of innovative goods of own production seems particularly attractive. Belarus also offers to innovative companies various types of free of charge assistance, such as marketing researchers and support of cross-border activities.

Tax privileges worked well in the case of the High Technologies Park. Belarus has become a global player in the software offshore market. The commercialisation of inventions will probably be more complicated. Producing software requires computers and young Belarusians. For commercialisation of an invention, construction and high quality equipment of a full plant or at least a laboratory are necessary. This means bigger investments and bigger risks for investors – another thing Belarus still “offers”…

No Science in Belarus?

The bias for the commercialisation of technologies at the expense of boosting fundamental science is not new for Belarus. Already in 2011, Lukashenka explained why he had reduced subsidies to the National Academy – Belarusian fundamental science’s cradle – by between 25 and 30 per cent. He announced the rules of the game, pointing out that the prior task now is import substation: “Should you provide it – we will support you, otherwise do not expect state support”.

According to the United Nations Economic Commission for Europe, already in 2008 the share of fundamental research in the total amount of R&D financing was only 36 per cent. In the Commission’s opinion, such a trend is appropriate from the near-term outlook. However, it is questionable from long-term perspective and in future is likely to worsen the overall R&D’s potential of the country.

Another detrimental consequence of this bias is a very low, if not adverse, financial incentive for Belarusian researchers. Disclosure in October of the salary of a scientist at the National Academy of Science resonated widely in Belarus. It amounts to about $230. A Minsk driver earns approximately between $500 and $1000 per month…

The figures do not only suppress innovative thinking among Belarusian scientists. They also persuade young Belarusians to choose another way of making money, despite their possible passion for research. The trend has already caused ageing in Belarusian science: namely, the number of pensioners among doctors of science (the highest scholarly degree in Belarus) has reached 60 per cent.

Infrastructure’s Failures

Still, money is not the only problem for Belarusian innovative development. The 2011 report of the United Nations Economic Commission for Europe on Belarus points to the administrative character of Belarusian innovation policy as being among the main problems.

The Commission’s experts note that because of Belarus’ “vertical approach” to the economy, institutions, programmes and laws have overfilled its innovations’ system as well. At the same time, on the horizontal level, the infrastructure has become quite helpless.

To be clear, National Academy of Sciences conducts about 90 per cent of fundamental and 70 per cent of applied research studies. As a rule, engineering design works are the task of special departments of the Ministry of Industry. Big state enterprises act as the main customers of innovative commodities. But these actors do not cooperate with each other directly. Interaction between the National Academy, enterprises and design companies is a matter of interest and relies upon agreement between the higher state agencies to which the actors are subordinate.

The main result of such an approach is low practical implementation of existing inventions. However, it also leads to a decrease in the effectiveness of spending the finances provided for R&D. The state should probably correct this fault before blaming the National Academy of Science for insufficient results.

Will Venture Investments be the Answer?

However, the situation may improve because the government itself seems ready for changes. Belarus is about to launch a mechanism of venture investment. A special law on this issue enters into force in January 2013. Creation of the necessary infrastructure is already in process.

The state is also trying to provide practical filling for this new framework. The middle of November turned Minsk into the city of business forums. Attraction of venture investment was among the core reasons for holding the 7th Belarusian Investment Forum, International Week of Entrepreneurship, and the 1st Youth Innovation Forum in Minsk.

Venture investing does not offer a solution to the core problem: regression of fundamental science because of poor financing and a rigid administrative approach. These are the challenges foreign investors are unable and, probably, unwilling to address.

What venture investors can do, is to motivate creativity and entrepreneurship in Belarus. If the government learns not to interfere too much with the market economy, venture investments may prove very effective. But the Belarusian authorities still have a long way to go.

Foreign Investments Weaken the Belarusian Regime

Belarus Investment Forum

Today the Belarus Investment Forum opens in Minsk. In recent years, Belarus has significantly improved its ranking in the Doing Business Report of the World Bank Group. This year it climbed two places, and on two parameters even made it into top 10.

Yet state plans to attract foreign investments fail year after year. Perhaps some in the ruling elite understand that the stronger the foreign investors in Belarus are, the weaker the Belarusian regime becomes.

This year, the government planned to attract $3.7bn in direct foreign investment, yet by 1 September only a quarter of this sum, $956.5m had been registered. The problems are evident not only in statistical data. Time and again the Belarusian government starts talking about large-scale ambitious projects and ends up proposing that investors just land.

Problems in the West

Only small scale investors and adventurers come to try their fortune in Belarus, economist Mikhal Zaleski recently commented to Radio Liberty in a discussion on the sad investment situation. He emphasised that though investment laws in Belarus looked smooth, investors have questions about political stability. Nobody knows who will run the country after Lukashenka and in which direction the nation will then be headed . Moreover, as Yaraslau Ramanchuk said when commenting at a series of Belarusian investment forums two years ago, “the government itself blocks foreign investments.”

In November 2010, at the Belarusian Investment Forum in Frankfurt am Main, Belarusian Metal Works (BMZ) signed with Italian firm Danieli a memorandum of intent to build new production facilities. The project could reach an investment of $1-1.5bn. Yet nothing has been implemented, as Danieli was willing to help find $1bn only if it got shares in BMZ. The government, for its part, wanted to retain all 100 per cent of the shares it owns.

In July 2010, the Minsk Regional Executive Committee and German company Enertrag AG signed an investment agreement to build a wind park with a capacity of 160 МW. It could cost about €360m and provide electricity to two districts. The Defense Ministry blocked the project, claiming that wind generators interfere with its radars.

At the first Belarusian Investment Forum in London in 2008, the Energy Ministry and Polish company Kulczyk Holding signed a preliminary agreement to construct in Belarusian Zelva a coal power plant. Planned investments should have reached $1.3-1.8bn. The richest Polish businessman Jan Kulczyk wanted to supply the power plant with mostly Polish coal and export part of its electricity to the EU.

Two years of negotiations ended with no results and were broken up after the 2010 Belarusian presidential elections and subsequent deterioration of relations with the EU. Kulczyk explained, “Such big projects should be done together with banks. Because of the current atmosphere around Belarus, it would be difficult to finance the project.”

Hunting Estates for Arab Monarchs

The problems, however, exist not only with Western businessmen. Belarus remains a problematic place for post-Soviet and Eastern entrepreneurs as well. Many of them – Russians, Poles, Iranians, Arabs – have tried to find a common language with Lukashenka and gave up.

Influential Russian oil and gas company Itera pledged to build a residential area and business centre to be known as “Minsk City” on the territory of the old Minsk airport. The amount of investment should have been about $5bn. Yet soon Itera put the project “on hold” and until now it has invested less than one per cent of the promised money and constructed only some a few ordinary panel houses. In February, the government cancelled the agreement with Itera.

In July, Omani State Reserve Fund renounced the investment project in centre of Minsk. In 2009, Lukashenka granted Omani businessmen favourable conditions to build in the historical area of the capital. They planned to construct a residential complex, a business centre and a five-star hotel for about $150m.

Last year, visiting Qatar, Lukashenka solemnly declared a project to create a “Qatar Island” in Europe. Belarusian officials explained that it would be a business and industrial centre of Arab countries and it would be built in Brest region. The only registered follow-up of these designs was revealing in September a document issued by Minsk Regional Executive Committee. It secretively regulated giving land plots to members of Qatar's ruling family to build hunting estates and facilities in the vicinity of Minsk.

Arab investors are known for being less than eager to undertake industrial production projects. Yet there hardly could be more stark a contrast than those events which took place in September than between two post-Socialist nations dealing with Arab investors. While Belarus tried to lure Qatar emir to hunt in Belarus, Belgrade concluded an investment deal with the United Arab Emirates which enabled it to revive the Serbian aircraft industry.

Serious Investors with €20,000

In the opaque bureaucratic mechanisms of the Belarusian state even the murkiest business is possible. In 2007, the Belarusian government gave a concession to the Luxembourgish company Polar Stars Group. It included two lignite deposits and two deposits of shale oil. The declared volume of investment was $2-3bn.

“I would say frankly, we are not going to study the investors' history and look at whose money they use,” said Lukashenka in 2007 and added that he had information confirming the serious reputation of the company's owner. The owner regularly called on the highest Belarusian officials till 2010. Finally, however, the media revealed that Polar Stars was founded in 2006 and its registered capital makes up only about €20,000. In 2010, the Belarusian government cancelled this dubious agreement.

In the absence of a noisy scandal, Belarusian society heard little about this incident. It is reminiscent of a similar incident in 1991. Then, Prime Minister Kebich granted one shrewd Italian the status of Belarusian Ambassador to all nations of the world, as well as gaving him an office in the centre of Minsk. The Italian had only promised Kebich that he would find loans badly needed by the Belarusian government. Only after the opposition vigorously criticised this affair, the government reviewed its decision.

The Belarusian government has serious problems handling foreign investments. It manages to combine contradictory attitudes. On the one hand, it enforces rather strict and inflexible rules. On the other, it lets dubious firms do serious business in Belarus.

Meanwhile, Belarus has no choice but to attract foreign investment. It has survived all these years economically because of Russian subsidies which, according to some calculations, have totaled about 15 per cent of Belarusian GDP. They are quite unpredictable, dangerous and likely to diminish.

Belarus has to replace these subsidies, which are also the foundation of Lukashenka's rule. Yet not with other subsidies; the EU is definitely not going to take over this role as Belarusian sponsor. Minsk has to reform the economy and create new production facilities and sources of revenues. For that, it needs serious investors. Any Belarusian government aware of national interests will have to deal with this task.

Only when this mission is accomplished will Belarusian independence and democratic transition become solidified. To scare foreign investments away from Belarus means to strengthen Lukashenka's regime and Russia's dominance in the country.